TN payday lender grows at breakneck speed amid industry criticism

Advance Financial labors to shine its public image

Apr. 5, 2013

Charles Dunn waits at Advance Financial in Bellevue. The fast and effortless nature of the transactions, especially check cashing, motivates him to choose Advance over his bank. / Dipti Vaidya / The Tennessean

Written by

Bobby Allyn

The Tennessean

Advance Financial has 33 locations, which pulled in $37 million in revenue last year. / Dipti Vaidya / The Tennessean

What is payday lending?

A payday loan is a short-term loan tied to a borrower’s next payday. A borrower gives a lender a predated check that the lender can cash in the event that the borrower never returns. The loans often require proof of income. In Tennessee, lenders cannot charge more than $15 per $100 borrowed. Once repaid, borrowers can take out the loan again, which they often do. If the two-week fees stretch out over a year, the annual interest rate often exceeds 500 percent.

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Deborah Jackson was living paycheck to paycheck when she walked into an Advance Financial store for a $425 loan.

She was late on her rent. A car payment and other expenses were looming.

“I needed a one-time loan to pay a light bill so they’d keep the lights on,” said Jackson, 57, who lives in East Nashville and works at a preschool.

Paying back the loan ate a sizable chunk of her take-home pay. With her bills piling up, she ended up re-borrowing her two-week loan, again and again, for nearly two years. Advance charged a $60 fee for each renewal, so the interest rate worked out to 585 percent a year.

Advance Financial has labored to shine its public image. It has been recognized for volunteerism and for treating its employees well. Its storefronts feature long windows and bright lights to help the company move beyond the notion of payday lenders as unscrupulous exploiters of down-on-their-luck borrowers. In fact, said company spokesman Cullen Earnest, they’re in business to help people.

“People get loans from us who might otherwise get them from people who might rough them up if they don’t pay back,” he said. “Nobody said these products should be the be-all, end-all, but without us, where would they go?”

And the hard-up borrowers keep coming. Jackson, faced with a medical emergency, took out a second loan with Advance instead of settling up. When she couldn’t pay either back eventually Advance, under the name Harpeth Financial, took her to court.

Jackson, who declined to be photographed, recently filed for bankruptcy, listing Advance as one of her creditors.

“If I could do it over, I never would’ve gone in there,” she said.

Fast growth

Advance Financial, founded in Franklin, has grown at breakneck speed.

With 33 locations, which pulled in $37 million in revenue last year, many a Nashville area resident has entered one of their 24-hour locations and contributed to their 200,000 transactions per month.

Company officials say their aim this year is to open a store every two weeks, following high-traffic corridors, ideally near intersections or highways. The company is scouting locations near Knoxville.

“If a fast-food chain can make it there, we can make it,” Advance President Mike Hodges said recently from the company’s headquarters on Church Street. In a room at the end of the building, dozens of employees work the phones, approving loans and calling borrowers about missed payments. The call center operates 24 hours a day. “We’re aware that our loans can be used and abused.”

Payday loans represent just 10 percent of transactions handled by Advance, or 20,000 per month. About 70 percent of their business is from bill pay, money order and pre-paid debit cards. The remaining 20 percent comes from title loans and installment loans. Average customer income, according to the company, is $28,000.

Some of the company’s 400-some employees are given bonuses tied to how many loans they hand out, and they are rewarded for how fast they can complete transactions.

“How do I go to sleep at night?” Hodges, 41, said. “I’m providing an option. And compared to others, it’s the best option.”

To date, 15 states have banned payday lending. Yet in the other 35 states, especially Tennessee, the industry is running rampant. Nationwide, there are twice as many payday lenders as Starbucks locations, according to the Center for Responsible Lending.

As Advance and other interest groups aligned with payday lenders donate generously to state lawmakers, Tennessee’s regulations have become some of the most permissive in the country.

“They’re advertised as a short-term loan, but nobody uses payday loans once,” said Paige Skiba, a Vanderbilt Law School professor who has studied the industry. “Payday loans increase bankruptcy filings, and many people get trapped in loan cycles,” she said.

Skiba does, however, understand that Advance fills a niche in the marketplace.

“For many low-income people, it’s access to credit,” she said. “There are not many other options.”

Serving the underbanked

Native Nashvillians Mike and Tina Hodges founded Advance, then known as Advance Payday, in 1996. Shortly before the Great Recession, the couple, by then under the Advanced Financial banner, expanded their services and stayed open later. When the economy slows, they say, so does business because loans are granted only with proof of regular income.

Advance sees itself as a steward of the so-called underbanked population. This might explain why Advance stores dot working-class communities, though the company says it opens stores along popular thoroughfares regardless of income levels.

Taking out a payday loan is often driven by unrealistic expectations and desperation. According to a study published in February by the Pew Charitable Trusts, the average two-week loan takes about five months to pay off, amassing hundreds of dollars in interest over that period.

In August, Advance opened a location on Highway 70 South in Bellevue as part of its push into wealthier neighborhoods.

Still, low-income people remain the most profitable segment for payday lenders.

According to Pew, 58 percent of payday loan borrowers have trouble meeting their monthly expenses. Eighty-six percent of borrowers cannot afford to repay loans every month.

Advance’s average payday loan amount is $350. The company issues about 20,000 of them each month. At this rate, Advance earns more than $1 million per month on payday loan interest.

A recent afternoon trip to the Bellevue location revealed a range of customers. Some were upper-middle-class area residents who have been paying off loans for months, citing rising expenses and the lack of rainy-day funds. For others, like Charles Dunn, 22, the fast and effortless nature of the transactions, especially check cashing, motivates him to choose Advance over his bank, Regions. Advance offers some services, such as money orders, for free as a way to bring people into their stores.

Lisa Harper, a 44-year-old Antioch resident, ended up in a legal dispute similar to the one Jackson faced.

After she missed a payday loan payment because she was saddled with other bills, Harper ducked the company’s repeated attempts to collect. “I had regular bills and this loan to pay. I just couldn’t do both,” she said.

Now Harper is fighting with Advance over $1,070. She hopes to undo a judge’s order to garnish her wages at the Tennessee Department of Health, where she works in administrative services.

Harpeth Financial, Advance’s holding company, has sued about 50 defaulted customers this year. It typically takes hundreds of customers to court every year over unpaid loans or bounced checks, or less than 1 percent of those who borrowed from them.

It does, however, point to something else about Advance: the company’s deep resources.

Political donations

Mike Hodges has for years donated thousands to Tennessee lawmakers, most recently under Advance PAC. In January, the group donated $21,400 to Gov. Bill Haslam.

According to Earnest, the company spokesman, the political action committee functions to “promote a sound business environment,” and the recent Haslam contribution was intended to help with his 2014 re-election campaign.

State lawmakers in 2011 passed a law that made payday loans more profitable for places like Advance. Haslam signed it into law that May.

Before the law took effect, the interest on each short-term loan could not exceed $30 or 15 percent of the loan amount, whichever came first.

Now, only the 15 percent cap remains, which means millions more in revenue for the company on larger loans.

Payday loans are regulated in Tennessee by the Department of Financial Institutions, but they have yet to come under federal rules. The new federal agency, the Consumer Financial Protection Bureau, has said it is still examining whether the loans should be federally regulated. The loans have become so commonplace that major, publicly traded banks have embraced them, too, so the decision has far-reaching consequences.

According to Tina G. Miller, attorney with Tennessee’s department, customer complaints are not available to the public. Still, the department’s most recent report, in 2011, shows that $43,000 was refunded to customers as a result of state violations.

Mike and Tina Hodges say the fees on their products help them give generous benefits to their employees, including starting pay of $12 an hour and full health coverage. They insist that their fees are not exorbitant compared with mainstream lenders.